All good booms must come to an end, and US housing and housebuilders have just had a seriously good boom. Shares in homebuilders have more than doubled since the start of last year, while the median price of new homes is higher than before the 2007 subprime crisis (not adjusted for size of home).
The biggest threat to the boom is a rising mortgage rate, as shareholders know full well.
Shares in housebuilders had moved roughly in line with mortgage rates until last month, as both rose and fell with hopes for the economy.
The sudden jump in rates in the past two months – from 3.4 per cent to 4.6 per cent for a 30-year fixed rate – changed the pattern. For the past six weeks or so a higher rate has been bad news for shares in housebuilders, driving them briefly down more than 20 per cent into a bear market, before recovering somewhat as rates dropped back to 4.3 per cent.
Confidence in soaring house prices, in other words, is fading. Shares of homebuilders peaked in May at a higher multiple of book value than back in 2005, when the US property bubble was nearing its peak. They are down sharply since then but the broad S&P 1500 index of homebuilders still trades at double estimated book value; two years ago it was at a discount.
There are some ominous signs. The institutional investors who underpinned the market by hoovering up thousands of homes to rent out have been reducing or stopping purchases. Consumer ability to afford mortgages has also fallen sharply as rates have risen. The National Association of Realtors reckons affordability is still very good but it uses median home prices in its estimates. Use median mortgages instead – far higher, as cash-rich investors tend to pick up cheaper properties – and affordability is back to pre-bubble norms, Will Denyer at Gavekal calculates.
This is no reason to panic. But the changes suggest housing is no longer a bargain. It will take signs of faster economic growth for housebuilders to benefit now.